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Bitcoins Offer Legitimate Benefits

At U.S. Senate hearing on virtual currencies, Department of Justice and SEC officials weigh in on the benefits of bitcoins.

The Department of Justice said bitcoins can be “legal means of exchange” at a U.S. Senate committee hearing, boosting prospects for wider acceptance of the virtual currency.

“We all recognize that virtual currencies, in and of themselves, are not illegal,” Mythili Raman, acting assistant attorney general at the Justice Department’s criminal division, said at the hearing.

The Committee on Homeland Security and Governmental Affairs, which solicited comments in an Aug. 12 letter, scheduled the hearing “to explore potential promises and risks related to virtual currency for the federal government and society at large” after the Silk Road Hidden Website was shut down in October. The closing of the marketplace, where people could obtain drugs, guns, and other illicit goods using bitcoins, is helping fuel a rally in the virtual currency as speculators bet that the digital money will gain more mainstream acceptance.

“The FBI’s approach to virtual currencies is guided by a recognition that online payment systems, both centralized and decentralized, offer legitimate financial services,” Peter Kadzik, principal deputy assistant attorney general, wrote in a letter dated Oct. 23. “Like any financial service, virtual currency systems of either type can be exploited by malicious actors, but centralized and decentralized online payment systems can vary significantly in the types and degrees of illicit financial risk they pose.”

Introduced in 2008 by a programmer or group of programmers going under the name of Satoshi Nakamoto, bitcoin is being used to pay for everything from gourmet coffee to smartphones on the Internet. There are almost 12 million bitcoins in circulation, according to Bitcoincharts, a website that tracks activity across various exchanges.

“Whether a virtual currency is a security under the federal securities laws, and therefore subject to our regulation, is dependent on the particular facts and circumstances at issue,” SEC Chairman Mary Jo White wrote in a letter dated Aug. 30. “Regardless of whether an underlying virtual currency is itself a security, interests issued by entities owning virtual currencies or providing returns based on assets such as virtual currencies likely would be securities and therefore subject to our regulation.”

Bitcoins reached a record high and were trading for $509 apiece at 8:57 a.m. on Bitstamp, one of the more active online exchanges, where the digital money is traded for dollars, euros, and other currencies. The virtual currency is up more than 30-fold so far this year.

“Two years ago it was alarm when Silk Road first came on the scene,” said Jerry Brito, senior research fellow at the Mercatus Center at George Mason University who is also testifying in front of the committee today. “Since then, Congress has been educating itself and understands that there are great potential benefits, and like any new technology there are going to be some challenges. But they see there is a balance to be struck here and they are generally positive on the technology.”

Since the virtual currency exists as software that’s designed to be untraceable, it’s an attractive tender for those seeking to transact anonymously via the Web. While the closing of Silk Road initially caused the digital money to lose a third of its value within days, bitcoins have recovered and rallied to record levels as speculators and investors bet that the currency will be less of a fad and gain more mainstream acceptance.

Federal Reserve

Ben Bernanke, chairman of the Federal Reserve, is also weighing in on the hearing, saying that it has no plans to regulate the currency.

“Although the Federal Reserve generally monitors developments in virtual currencies and other payments system innovations, it does not necessarily have authority to directly supervise or regulate these innovations or the entities that provide them to the market,” Bernanke wrote in a letter to the committee.

The hearings will bolster the view that bitcoins are an acceptable alternate means of conducting transactions, and that their use will grow, said Brito.

“These hearings means bitcoin is finally coming into its own; it’s a real thing and it’s not going anywhere and these hearings highlight that,” he said.

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